GM to sell GMAC stake to Cerberus

PadraicCassidy

NEW YORK (MarketWatch) -- General Motors Corp. said Monday that it's selling a 51% stake in General Motors Acceptance Corp., its most profitable unit, to an investor group led by Cerberus Capital Management.

GM
GM, -0.23%
said it would generate some $14 billion in cash from the deal over three years, a boost in liquidity at a time when the No. 1 U.S. automaker has agreed to a turnaround plan involving the buyout of thousands of union employees.

"This agreement is another important milestone in the turnaround of General Motors," said Chief Executive Rick Wagoner. "It creates a stronger GMAC, while preserving the mutually beneficial relationship between GM and GMAC." He said the deal was not a sell-off but a partnership. "I think this is just what the doctor ordered as a matter of fact," Wagoner said in a conference call.

GM's shares, part of the Dow Jones Industrial Average, rose briefly in early trading but then turned negative following a hesitant reading on GMAC's credit rating by several debt-rating companies and lower auto sales for March.

The deal, approved Sunday by GM's board, includes $7.4 billion from the Cerberus consortium at closing. It also includes an estimated $2.7 billion cash distribution from GMAC related to the conversion of most of GMAC and its U.S. subsidiaries to limited liability companies, GM said.

In addition, GM will keep about $20 billion of GMAC automotive lease and retail assets with an estimated net book value of $4 billion. The auto manufacturer has a 10-year option to buy back the entire auto-financing unit under certain conditions, including the return of an investment-grade rating.

The deal should lead to an improved credit rating for GMAC, GM's main motivation for the sale, according to Calyon Securities analyst Joseph Amaturo.

But GM appears to have sold a strategic business for less than optimal value, according to Deutsche Bank analysts, reducing the company's long-term profitability and raising the possibility that the United Auto Workers union will have less incentive to concede any ground in 2007 contract negotiations.

The sale of GMAC "is a tremendous drain on GM's earnings power," taking about $2.50 a share in earnings off the table, according to Merrill Lynch analyst John Murphy. That deficit, at a time when GM's core auto operations are losing billions, will put even more pressure on management to turn that part of the business around, Murphy said.

"It's not a sale of GMAC by GM and saying, 'Nice knowing you,' " said GMAC Chairman Eric Feldstein. "They retain a 49% stake [and] there's a 10-year operating agreement" and stipulations that ensure GMAC and GM continue to do business.

GM expects to take a second-quarter pretax charge of $1.1 billion to $1.3 billion in connection with the GMAC sale.

Cerberus is also bringing in the private-equity arm of Citigroup Inc.
C, +0.05%
as an investor, as well as the Japanese bank Aozora Bank Ltd. Citigroup will arrange two syndicated credit facilities valued at $25 billion to fund GMAC operations.

Separately, GM on Monday said it sold 14.3% fewer cars and trucks in March, pushing the shares lower. Hummer sales, however, rose by 175.9% in March. See full story.

Profit center

GMAC's board will have 13 members: six appointed by the acquiring partners, four appointed by GM and three independent members.

Since 2001, most of GM's profits have come not from selling cars but from the auto financing and mortgage and insurance sales of GMAC.

GM is hoping to cut structural costs in North America by $7 billion on a running-rate basis by the end of 2006, and to reduce global structural costs to 25% of revenue by 2010, down from 34% in 2005.

On Friday, a U.S. District Court in Detroit approved a key health-care settlement agreement between GM and the United Auto Workers union. GM said the deal will save $1 billion a year in cash and reduce its retiree health-care liabilities by about $15 billion.

Under the agreement, the company's hourly U.S. retirees will for the first time pay deductibles, premiums and co-payments, up to $370 annually for individuals. See related story.

Earlier Friday, Delphi Corp.
DPHIQ
GM's largest supplier, asked a bankruptcy court to void its labor contract with the UAW after the union rejected Delphi's latest demands to cut wages and benefits. The union has warned that canceling the contract would trigger a strike, which in turn could cripple GM. See full story.

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